Defence indigenisation under Budget squeeze

The Defence Budget for 2013-14 starkly underlines the gap between the minister's proclamations about the need to indigenise defence equipment on the one hand, and the money his ministry allocates for developing equipment on the other.

On February 20, buffeted by allegations of wrongdoing in the Ministry of Defence (MoD)'s Rs 4,000-crore purchase of VVIP helicopters, Minister A K Antony declared the indigenisation was essential to eliminate corruption in arms procurement.

Just eight days after, it was clear this would not be pursued seriously, at least during the coming financial year. In the Defence Budget for 2013-14, the 'Prototype Development' head, from which indigenous projects are funded, was allocated just Rs 1 crore, down from Rs 89 crore in the previous year.

The allocations for 'Prototype Development' are made under Major Head 4076 of MoD Demand No 27, Capital Outlay on Defence Services.

This allocation is intended to fund 'Make' category projects, i.e. defence systems developed by consortiums led by Indian companies, with the MoD financing 80 per cent of the cost. Currently, the MoD is processing two 'Make' category projects " a Tactical Communications System (TCS), a mobile communications backbone network for the field army; and the Future Infantry Combat Vehicle (FICV), an armoured, tracked vehicle that carries infantry into battle.

Last year, the Rs 89 crore allocated for 'Prototype Development' exactly matched the payout to be made for the TCS project. But MoD has not disbursed a single paisa of this. The amount will be surrendered on March 31.

"The non-utilisation of last year's allocation, and the allocation of just Rs 1 crore for this year, makes it clear the MoD is paying lip service to indigenisation. Clearly no 'Make' category projects will see any progress in the coming year," says a chief executive officer (CEO) of a company engaged in the defence business, speaking anonymously.

Business Standard has learnt the MoD's acquisition wing has handed the national security advisor a list of 100 defence items that can be pursued indigenously as the 'Make' category projects. But there has been no movement on these projects, either in the MoD or the National Security Council.

Further, the Ministry of Finance (MoF) has ignored the recommendations of the Federation of Indian Chambers of Commerce and Industry (Ficci) and Confederation of Indian Industry (CII) that defence manufacturing be given tax benefits under Section 80-IA of the Income Tax Act, which is provided to long-gestation, capital-intensive industries such as power.

This compensates domestic industry for the high cost of capital in these long-gestation industries. Under Section 80-IA, the profits that eventually accrue are allowed a five-year tax holiday. Ficci and CII have argued that defence manufacture, a highly capital-intensive industry, should be allowed this incentive. The Budget has entirely ignored this recommendation.

"It is disheartening that the government has again ignored the important issue of extending Section 80-IA benefits to investments in defence manufacturing. I hope this omission and the cut in the Prototype Development allocation is an aberration that will be corrected before the budget is approved," says Rahul Chaudhry, CEO of Tata Power (strategic electronics division).

The MoF and MoD have also ignored a Ficci recommendation that companies doing defence research and development (R&D) be allowed tax incentives under Section 35AB. This provides 200 per cent tax benefit for money spent on defence R&D.

The industry argues defence R&D uses the same people and infrastructure that earn tax-exempt dollar income when deployed in streams such as design engineering services. With no tax exemption under Section 35AB for defence R&D, domestic industry would prefer to deploy personnel in fields where tax incentives exist.

Despite urging indigenisation, Antony apparently believes private companies themselves should invest the enormous sums that go into defence R&D. On January 31, speaking to an industry gathering here, Antony called upon the Indian defence industry to forsake its "miserly attitude" towards R&D spending.